National Drug Strategy
National Drug Strategy

The avoidable costs of alcohol abuse in Australia and the potential benefits of effective policies to reduce the social costs of alcohol

Appendix A. Methodological issues

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This appendix provides a more detailed consideration of the methodological issues involved in the estimation of the avoidable costs of substance abuse than is presented in the main body of this report. The exposition is largely based upon the International Guidelines for the Estimation of the Avoidable Costs of Substance Abuse (Collins et al., 2006).

A1. The nature of avoidable costs

As explained in the original International guidelines for estimating the costs of substance abuse published by the World Health Organization (Single et al., 2003), estimates of the costs of substance abuse constitute just one component in a range of potential economic information on substance abuse. The following table from this WHO publication presents a summary of the hierarchy of potential economic information on the costs of substance abuse, together with examples of their possible uses. This table puts avoidable costs in the context of the range of possible types of abuse cost studies.

Table 30. Substance abuse cost estimates and their policy uses

Type of estimateInterpretation of resultsExample of policy use
Aggregate costsTotal external costs of substance abuse compared with the alternative situation of no substance abuseIndication of the size of the substance abuse problem
Avoidable costsPotential economic benefits from substance abuse harm-minimisation strategiesDetermination of the appropriate level of resources to be devoted to harm-minimisation strategies
Costs incidenceThe distribution of the external costs of substance abuse among various community groupingsMobilisation of support from various groups (for example, the business community) for anti-substance abuse programs
Disaggregated costsExternal costs of substance abuse disaggregated by categoriesEconomic evaluation (cost-benefit or cost-effectiveness analysis) of harm-minimisation programs
Budgetary impactThe impact of substance abuse on government expenditures and revenuesAssessment of the case for industry compensation payments to government as a result of abusive use of substances which the industry produces

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In estimating the aggregate costs of substance abuse, the actual substance abuse situation must be compared with some alternative hypothetical situation, known as the counterfactual situation. This counterfactual situation is usually a situation in which there has been no past or present abuse of the substance(s) in question. Thus the counterfactual situation is implicitly one in which the community would bear no substance abuse costs. A comparison of the actual situation with the counterfactual zero-abuse situation indicates the extra costs which abuse has imposed on the community.

However, the counterfactual situation is purely hypothetical and in almost all circumstances most unlikely to be realisable, even over long periods of time. Estimates of the aggregate costs of drug abuse comprise both avoidable and unavoidable costs. As Single et al. (2003) state: Avoidable cost estimates do not, in themselves, indicate the rates of return which the community might achieve. However, without knowledge of the avoidable component of substance abuse costs it is difficult to undertake meaningful cost-benefit or cost-effectiveness analysis of prospective expenditures on prevention and/or treatment.

The estimation of social costs involves, in principle, first the estimation of the relevant avoidable proportion of each of the cost categories and then applying these proportions to each of the relevant aggregate cost estimates. Since not all substance abuse costs fall on the government sector, governments are likely to show an interest in the proportions of budgetary costs which are avoidable. Information developed for estimating the avoidable proportions of aggregate costs can also be readily applied to the estimation of avoidable budgetary costs.

A2. Reasons for estimating avoidable costs

The Health Canada avoidable cost guidelines (Collins et al., 2006, section 1.3) identify the following four major reasons for estimating the avoidable costs of substance abuse.

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Priority for substance abuse expenditures

Appropriate targeting of specific problems

Identification of information gaps and research needs

Provision of baseline measures to determine the efficiency of drug policies and programs

A3. Approaches to the estimation of avoidable costs

Collins et al. (2006) provide an extensive discussion of possible approaches to the estimation of the avoidable social costs of substance abuse. The following exposition constitutes a brief summary of the discussion in that publication.

It is important, from a public policy perspective, to be able to identify the proportion of the estimated aggregate social costs of substance abuse which is potentially susceptible to reduction, and the period over which such reduction could be achieved. This information will yield estimates of the value of avoidable costs and, accordingly, of the potential benefits of policies to reduce these costs. These types of estimates for tobacco have been made by the present authors for various Australian states for targeted reductions in the rates of smoking prevalence (see Collins & Lapsley, 1999, 2001, 2004, 2005, 2006 and 2008c). The next stage would be to identify the nature of the programs necessary to achieve these reductions and the costs of these programs. It then becomes possible to estimate the social rate of return accruing to programs designed to achieve the elimination of avoidable costs.

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This complete process can be summarised as consisting of the following stages:
  1. estimate the aggregate social costs of the substance abuse under study;
  2. estimate the proportion of these aggregate costs which are avoidable;
  3. estimate the time period over which the potential reduction in aggregate costs could be achieved;
  4. determine the nature of the programs which would achieve this reduction and the costs of these programs; and
  5. calculate the social rate of return which would result from the elimination of the avoidable costs.
Stage 1 has been completed by the publication of Collins and Lapsley (2008a). The present study completes Stage 2 for alcohol abuse.

The avoidable cost concept explored here has been contrasted by Collins et al. (2006) with the economic concept of the optimal level of substance abuse. In essence, the estimation of avoidable costs takes no account of the costs which would be incurred in achieving the required reduction in substance abuse and so, of itself, the concept yields no information on rates of return. The concept of the optimal level, on the other hand, takes explicit account of the costs involved in reducing substance abuse.

The estimation of the avoidable costs of substance abuse involves determination of the maximum reduction in substance abuse costs which effective policies can be expected to achieve. The lowest achievable level of substance abuse is termed the Feasible Minimum. The Health Canada avoidable cost guidelines identify four possible approaches to estimation of the Feasible Minimum. Which approach should be adopted for any particular type of cost is very much a pragmatic decision, taking into account data availability and the theoretical advantages and disadvantages of the various approaches.

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The distributional approach

The Health Canada avoidable cost guidelines identify two different approaches to disease risk-factor attribution:
  1. The classical epidemiological approach. In this approach disease risk is estimated with respect to exposure and non-exposure of various populations to a single specific risk factor. In effect the counterfactual scenario question asked is ‘What would have happened if no exposure had occurred?’
  2. The distributional approach. This not only looks at distributional shifts at one time but also considers the future time dimension, thus being able to predict future developments. This approach asks the question ‘What would happen if factor distributions shifted to different counterfactual scenarios?’ Thus this approach, which is explained fully in the guidelines, conceptualizes the avoidable burden by specifying alternative scenarios for risk-factor distributions, including potential future distributions.

The Arcadian Normal

The Health Canada avoidable cost guidelines (Section 3.6) describe this approach as follows:

Exposure-based comparators

The two approaches discussed above impose substantial data requirements. In addition, the Arcadian Normal is based upon current disease outcomes rather than upon current or potential risk exposure. The latter approach is the preferred approach of the avoidable cost guidelines.

A considerable amount of information on alcohol consumption is available for Australia, both nationally and state-by-state, and internationally. In principle, these data can be used to estimate Feasible Minimum exposure rates and, by extension, avoidable costs.

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Evidence on the effectiveness of interventions

The avoidable cost guidelines make the following points: Reference to evidence on the effectiveness of policy interventions is, accordingly, a very useful addition to the tools of avoidable cost methodology in certain circumstances.

Which method to adopt?

Of the four methods discussed above, the issue of which method(s) to adopt in relation to a particular category of attributable cost is very much a pragmatic issue. It depends upon data availability and upon information on the effectiveness of relevant public policies.

A4. Time lags associated with policies to reduce substance abuse

Estimation of avoidable costs implies the calculation of a Feasible Minimum below which real costs cannot be reduced. However, this minimum may only be attainable after an extended period of time—that is, with an extended lead time. The lead times involved in reaching the Feasible Minimum are of three types:
  1. policy implementation lead times, since policies cannot be instantly designed, legislated and implemented;
  2. lead times between the reduction in exposure to risk and the consequent reduction in the adverse consequences of exposure; and
  3. lead times between the reduction in exposure to risk and an adjustment in the population structure which fully reflects the reduction in premature mortality.
In general, the longer the period of analysis over which the estimates are undertaken, the higher will be the proportion of costs which will be avoidable, although there will certainly be a time period beyond which no further cost reductions are possible. In addition, lead times are likely to differ according to the type of cost under consideration.

The present study attempts, within the constraints imposed by the available data, to estimate the value of the potential reduction in the social costs of alcohol abuse in Australia (that is, the avoidable costs of alcohol). The estimates presented are expressed in 2004/05 dollars. This should not, however, be taken to imply that, had a set of appropriate policies been implemented prior to that year, all these benefits would actually have accrued in 2004/05. Some benefits (relating to acute problems such as drink-driving and alcohol-attributable violence) would accrue very quickly. Other benefits (relating to chronic conditions such as pancreatitis and liver cirrhosis) would be subject to substantial accrual lags. It has unfortunately proved difficult to estimate these lags (see Rehm et al., forthcoming, for a review of some of the relevant literature). Our estimates are expressed in 2004/05 dollars but these benefits could not have fully accrued in 2004/05.

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The issue of the actual time profile of benefits becomes very important once attempts are made to undertake cost-benefit analysis of particular polices. In cost-benefit analysis, the future time streams of both policy benefits and implementation costs are, for the purposes of comparison, converted into dollar figures for a common single year, by use of an appropriate social discount rate. Cost-effectiveness analysis simplifies the process by comparing the discounted costs of policies all aimed at producing the same objective or output (for example, a given reduction in accidents resulting from drink-driving). However, this simplification inevitably results in a reduced usefulness for the research results, since only policies with the same output can be compared.

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